Trick or Treat!

361 Capital Market Commentary | October 28th, 2019

Wow, this is going to be a big week. For the locals, a two-day freezing snowstorm here in Colorado has created an audible on our Halloween costumes from warm weather to cold weather. For market participants, there is only a deep freeze for short investors as the markets reach new all time highs today, but there will be a gauntlet of news to keep us busy this week:

  • The FOMC meeting news will drop on Wednesday. Expect a 25 basis point cut in the Fed Funds rate, but more importantly will there be any guidance on what the Fed will do next?
  • A big week for jobs data with the ADP on Wednesday, the Challenger on Thursday and the Labor Department on Friday. We expect the non-farm payroll to come in below 100,000 due to the GM strike, but how low?
  • Every day the White House tells us they are one step closer to a trade deal with China which will be signed in November. Will we get some details about Phase 1 this week?
  • Thursday is Halloween for the kids and the first Impeachment vote in the House. Who will be more fired up for candy?
  • Brexit looks to be pushed out to January, while another vote may be moving forward for December. (No tricks or treats for anyone in the U.K. right now.)
  • And don’t forget that this is the 2nd massive week of earnings. Get ready for more individual stock volatility just like last week.

So much is going on right now in the markets. U.S. economic data and forward company earnings guidance continues to slide, but the Fed is going to cut rates which might give us more down the road. Bad news is good news right now. And good news might also be good news if you are invested in the right sectors or factors. Tricks and treats then?

A sarcastic ‘Yes’ from Charlie…

Tweet from Charlie Bilello

Thank you passive indexing?

Apple + Microsoft is now racing the entire Russell 2000.

Tweet from Bespoke

J.P. Morgan thinks that U.S. earnings could rip up if the trade wars are ended…

Message from JP Morgan
(@themarketear)

Political candidates would be best to listen to all Americans who want more foreign trade…

American's View on Effect of Foreign Trade on US
(Gallup)

A resumption of trade and an acceleration of GDP would shift cyclical and value stocks into a higher gear at the expense of growth stocks…

Growth vs Value
(Goldman Sachs)

Looking at corporate earnings, beats have been big this Q3, but forward guidance still remains a concern…

Corporate Earnings
(J.P.Morgan)

This chart shows the next three quarters earnings estimates all moving lower…

S&P 500 EPS Growth Estimates
(@EPBResearch)

It is a similar story in Europe, but more interesting is the reward that companies are getting for posting a beat this quarter…

The reward for beats this quarter
(Goldman Sachs)

Does this model suggest a potential bottoming in global EPS growth?

BofAML Global EPS Model
(BofA/Merrill Lynch)

Texas Instruments hopes that global growth does stop declining…

@TeddyVallee: $TXN sales YoY (w/ implied guide) vs. global PMI

TXN Sales YOY vs Global PMI

As does global powerhouse MMM…

Organic Local-Currency Sales Growth
(@TSOH_Investing)

Another very big week of earnings to come…

Most Anticipated Earnings Releases October 28, 2019
(@eWhispers)


Check out the U.S. drilling rig count…

Baker Hughes US Crude Oil Rotary Rig Count
(WSJ/DailyShot)

Energy high-yield spreads have continued to widen…

Bloomberg graph of Energy spreads
(WSJ/DailyShot)

Which has led to the financial markets shutting down to energy producers…

Capital markets grow wary of US oil and gas producers
(FinancialTimes)

The markets continue to watch for depressed debt sectors…

Tweet from Lisa Abramowicz

But the weakness in energy has still not infected the rest of the high yield bond sector which is a big positive for other risk-taking areas of the market…

Bloomberg Barclays US HY Yield to Worst
(WSJ/DailyShot)

But the markets will continue to watch for signs of corporate balance sheet stretching…

Cash balances have plummeted
(@ISABELNET_SA)

One big corporate bond investor is very cautious…

Pimco is steering clear of US corporate bonds, opting to give up some of the sparkling performance offered by this corner of the debt markets because of concerns over the possibility for a rapid decline in prices in an economic downturn.

Speaking to the Financial Times, the bond giant’s group chief investment officer Dan Ivascyn warned that investors are not being properly compensated in US corporate debt markets, given weakening credit quality and the lack of protections for bondholders.

“The credit sector has been well behaved but if people begin to really fear recession, we can see underperformance quickly,” he said. “This is the sector most prone to overshooting on the downside.”

(FinancialTimes)

Speaking of bonds, would you own the debt of an entity with worse fundamentals than Uber but which also has its own printing press?

Tweet from Leo Polovets

Germany might beat the U.S. in soccer, but they can’t touch us in deficits…

U.S. budget deficit
(@byHeatherLong)

Few think there will be a better time to sell a house…

U. Michigan Selling Conditions for Houses
(WSJ/DailyShot)

But prices just wound down a notch…

FRED Median Sales Price for New Houses
(WSJ/DailyShot)

If home sales are adjusted for population growth, this dip in prices may not last long…

New Home Sales
(@JeffSnider_AIP)

Why are we watching the Jobs data so closely this week? Because our economy depends on it.

@ISABELNET_SA: US Consumer Spending Consumers may spend less going forward. Slower job growth usually leads to a slowdown in consumer spending

Consumer spending moves

Blue Horseshoe loved Tiffany last week…

If you watch the tape closely, then you noticed the unusual activity that occurred on Thursday and Friday in Tiffany. Loose lips sink ships and the U.S. regulators will track this down because every trade leaves a paper trail.

TIF

What happens to a stock when you flush out all the passive index investors?

Could this be some new MBO activist strategy? Find a company with less than 300 shareholders and announce plans to delist your stock, thus flushing out most all mutual fund shareholders. The Tile Shop has 51m shares outstanding. With the announcement to delist, most mutual funds had to hit the eject button causing a 65% collapse in its stock price. The pullback has made for a cheaper opportunity for the company to take itself private. I have never seen this done before.

The Tile Shop Announces Plan to Delist
TTS
Tile Shop Holdings Inc Major Shareholders
Fund Owners' Style TTS
(Morningstar)

J.P. Morgan is considering trading the new NYC HQ for a move to Plano, TX…

The moves are a response to a variety of forces that weigh on companies doing business in New York, including high taxes and expensive real estate. JPMorgan is also making good on a threat to move jobs out of the city after Mayor Bill de Blasio’s administration in 2014 rejected the bank’s demands for as much as $1 billion in tax breaks and cash to keep employees in New York. Dimon said privately in the years after the financial crisis he didn’t think New York politicians stood up for one of the region’s biggest industries.

The collapse of the Amazon deal also hurt one of the arguments for keeping more employees in New York, according to people briefed on the plans. Executives had hoped Amazon’s arrival would lure more tech-savvy workers to the area, with JPMorgan planning to draw from the same pool to add to its 50,000 tech staffers, said the people….

Cheap housing and the absence of a state income tax have made Texas popular with workers, while low corporate taxes and a reputation for a pro-business regulatory environment have persuaded large employers to relocate. JPMorgan struck a deal with the city of Plano in 2016 to relocate 4,800 employees to the area in exchange for a $4.9 million economic grant and a temporary tax abatement.

For JPMorgan employees, a move comes with some perks. In New York’s Tribeca neighborhood, $1.05 million will get you a 605-square-foot, one-bedroom apartment with an open kitchen, windowless bathroom and shared roof deck. In Plano, the same price gets you a 5,684-square-foot home with five bedrooms, six bathrooms, a 400-bottle wine room, a covered patio with wood-burning fireplace and a combined pool and spa.

(Bloomberg)

Lone Star Shift

Meanwhile, Equity Residential wants to trade apartments in Washington, D.C. for a big move into Denver…

Executives from Equity Residential, the Chicago-based publicly traded real estate investment trust that focuses on multifamily properties, wants to sink a lot more money into Denver’s hot market.

On a third-quarter earnings call Wednesday, CEO Mark Parrell said Equity Residential has a goal of building it Denver presence so that it makes up 5% of the company’s net operating income. Today, it’s about 1.5%.

To accomplish that goal, Parrell says it needs to more than triple its current investment — about $600 million — in the market to about $2 billion.

“That’s probably funded with some incremental capital, but probably some recycling out of places like Washington, D.C., where we like the market, but we have a significant concentration and where there has been some serious supply issues over the years, as well as maybe some money from some of the other markets here and there,” he said.

(DenverBusinessJournal)

Now if Equity Residential could only find a way to broadcast our top-ranked hockey and basketball teams…

Contract Dispute Means Blocking Nuggets and Avalanche games

Denver sports fans are facing a philosophical conundrum. If a game is played and no one watches, did it really happen?

Because of a TV-industry dispute, it is virtually impossible for anyone in Denver to watch the Denver Nuggets basketball team or hockey’s Colorado Avalanche. In general, broadcasters sometimes find themselves in disputes with one pay-TV company or another. In Denver, there is a blackout from all major providers at the same time, something unheard of in modern American sports history.

Sports bars are no consolation. Only one in town has access to the right channel, and that is only because it is hooked up to the arena where the teams play.

(WSJ)

If there are few vaping illnesses or deaths in the U.K. and they don’t allow THC vaping, then I think we have our answer…

In both the U.K. and the U.S. the rapid growth in vaping has coincided with rapid reductions in smoking rates, especially among young people. Yet there is a stark contrast between the two countries in how vaping has been treated by public health authorities and, as a result, in its safety for users.

In Britain, vaping is all about nicotine, not drugs. It is socially acceptable and is confined almost entirely to people who have smoked, even among the young. Less than 1% of vapers are people who have never smoked, and there is little sign of young people taking it up faster than they would have taken up smoking.

There are now 3.6 million vapers in the U.K. and 5.9 million smokers (some people are in both categories). Many British smokers have switched entirely to vaping, encouraged by the government, whose official position is that vaping is 95% safer than smoking, an assertion now backed by early studies of disease incidence. The organizations that have signed a statement saying that vaping is significantly less harmful than smoking include Public Health England, the Association of Directors of Public Health, the Royal College of Physicians and the Royal Society for Public Health.

There have been no deaths and few if any cases of lung illness directly attributed to vaping in the U.K. A recent study has concluded that vaping is now helping up to 70,000 people stop smoking every year by reaching those who failed to quit smoking by other means. “The British public have voted with their feet and are choosing to use e-cigarettes. This is a positive choice, and we should promote it,” says Prof. Linda Bauld of Cancer Research U.K.

(WSJ)

In other health-related matters…

In recent years, hospitals and medical centers across the country have stopped selling sugar-sweetened beverages in an effort to reduce obesity and diabetes.

Now a new study carried out at the University of California, San Francisco, has documented the health impact of a soda sales ban on its employees. Ten months after a sales ban went into effect, U.C.S.F. workers who tended to drink a lot of sugary beverages had cut their daily intake by about half. By the end of the study period, the group had, on average, reduced their waist sizes and belly fat, though they did not see any changes in their body mass index. Those who cut back on sugary beverages also tended to see improvements in insulin resistance, a risk factor for Type 2 diabetes.

The new research, published on Monday in JAMA Internal Medicine, is the first peer-reviewed study to examine whether a workplace sales ban on sugary drinks could lead to reduced consumption of the beverages and improve employee health. At least nine other University of California campuses have said they are going to adopt similar initiatives to reduce sugary beverage sales and promote water consumption…

According to the Harvard School of Public Health, sports drinks, fruit punches, sodas and other sweetened drinks are the single largest source of calories and added sugar in the American diet and “a major contributor to the obesity epidemic.” Large studies have linked them to an increased risk of Type 2 diabetes, heart disease and premature death.
(NYTimes)

Sodas
(Fred R. Conrad/The New York Times)

Speaking of beverages, restaurants moving toward delivery better figure out how to survive without their largest profit item…

@nosunkcosts: Direct cannibalization has a lot of downsides to a restaurant — with perhaps the primary downside being the lack of beverage orders, which are the single highest gross margin item on the menu

Beverage Orders
(Medium)

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